Success and Failure in the Chinese Fast Food Industry: It's All About StandardizationPublished: May 10, 2006 in Knowledge@Wharton
Qiao Ying and his Chinese fast food chain recently stepped into the spotlight -- not for the first time -- with the announcement that the Hong Gao Liang (Red Sorghum) chain will open a store in Beijing's Zhongguancun, also known as the Silicon Valley of China.
After founding Hong Gao Liang -- the first Chinese fast food chain in the country -- in Zheng Zhou in 1995, Qiao Ying became famous by coming up with a slogan designed to challenge McDonald's already high name recognition. Despite a lack of funding, Hong Gao Liang expanded fast: Over a two-year period it opened up more than 50 stores in over 20 cities, including Shenzhen and Shanghai. However, the rapid expansion, a funding shortage and a lack of managerial capability pushed Hong Gao Liang into trouble. The chain stores scattered across the country lurched out of control, leading to quality problems and a loss of customers. In 1998, Hong Gao Liang was on the verge of collapse and Qiao Ying was temporarily jailed for illegal fund-raising practices.
The collapse of Hong Gao Liang wasn't the only failure. The retreat of Rong Hua Chicken also proved attention-grabbing. "Wherever there is a KFC, there will be a Rong Hua Chicken!" was the ambitious slogan that accompanied the chain's opening of its first store in Beijing in 1994. It took only two years for the chain to book a record 1.5 million yuan ($187,000) in monthly sales per store. Six years later, however, Rong Hua Chicken closed its last store, in Beijing's Andingmen. Some industry experts blamed a lack of standardization for the chain's demise -- including its failure to set strict rules on raw materials and food-processing methods. Meanwhile, it also failed to standardize services by specifying a code of conduct for its employees or unifying the layouts of its chain stores. This led to uneven levels of quality within the individual stores, and customers soon lost their appetite.
But there are success stories, too, when it comes to standardization in China's fast food industry. Those include Da Niang Dumpling and Ji Xiang Wanton. Founded in 1996, Da Niang Dumpling developed more than 200 chains in 10 years. It expanded into overseas markets, including Indonesia and Australia. In 2004, the chain ranked 46th out of the top 100 restaurants in China. Founded in 1999, Ji Xiang Wanton set up more than 400 chains in only six years. Both chains are committed to standardizing their products and their management. For instance, Ji Xiang Wanton has set rules on the size of each offering and how each wonton should be prepared. Da Niang Dumpling, starting in 2003, spent a total of 100 million yuan on a processing facility designed to provide for all its chain stores worldwide.
Learning from the Leaders
Despite the high-profile failures, each year double-digit growth in the Chinese fast food chain industry manages to lure investments from both home and abroad. Since 2004, foreign investors have been increasing their activity in the fast food industry. On February 6, 2004, Jollibee, the biggest fast food chain in the Philippines, acquired an 85% stake in Yong He Soy Milk, marking its entry into the Chinese market. Jollibee plans to increase the total number of Yong He Soy Milk chain stores to 1,000 in the next eight years. In October 2004, Hong Kong's Da Jia Le Group opened its first store in Shanghai; it also plans to quadruple the number of its stores in non-metropolitan areas in the next few years. On April 27, 2005, Yum! opened its first fast food chain in China -- Dong Fang Ji Bai, in Shanghai's Xujiahui. Only a month later, it opened a second in Pudong's Changli.
Hong Kong's Da Jia Le Group, which owns a number of chains, including the name brand Da Jia Le, has already surpassed McDonald's to become the leading fast food operator in Hong Kong. Founder Luo Tengxiang had realized early on a huge advantage enjoyed by western fast food operators -- standardized management. After taking into account the characteristics of Chinese fast food, Da Jia Le came up with detailed processes covering everything from raw material supply to food preparation to services. At the same time, Da Jia Le copied McDonald's' supervision system under which the company sends supervisors -- disguised as customers -- to conduct random examinations in areas such as food quality and services.
Chowking in the Philippines offers another success story. Chowking sells buns, noodles, rice dishes and other kinds of Chinese food. With more than 200 stores nationwide, Chowking is just as successful as the country's fast food leader, McDonald's. Chowking has adopted several standardization measures, starting with its R&D process, which includes three stages: First, its Hong Kong chefs determine what to sell based on the market demand. Second, its chefs in the Philippines determine how to prepare those offerings. Then, all of its chefs go through a training and examination process. After the first preparation process, Chowking moves into automation to maximize the company's efficiency. Thanks to its investments in technology, it only takes a few simple steps to complete all its food offerings. Chowking has also established a strict supervision system to ensure the implementation of its rules and policies.
Talent is Key
According to a May 2005 report on China's fast food industry by Beijing's Kai Lang Bo Si Consulting, the difficulty associated with standardization lies in implementation and management, not product: Although some local companies have managed to standardize their product offerings, they are still having a hard time standardizing their operations.
Su Jingshi, president of Yum!'s Greater China operations, said at a forum in 2004 that talent is key. As Chinese fast food chains move toward standardization, he noted, managers must have knowledge and experience, specialized experts and capital. Business scholar Wen Yuankai also pointed out that McDonald's set up seven "hamburger universities" worldwide just to realize its goal for standardized management. All of its branch managers have to be trained there so as to ensure a universal culture at its stores around the world. By comparison, he said, there remains much that Chinese fast food operators must do in order to catch up with those kinds of training and educational programs.